Rules Protects Investors in 401(k) Plans

The U.S. Supreme Court has put companies managing 401(k) retirement plans on notice they have a continuing duty to be judicious on plan investment decisions, adding protections for the employee savings plans.

A unanimous court said in May that plan administrators must continue “to monitor trust investments and remove imprudent ones,” the Wall Street Journal reported. “This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”

The case involves investors in Edison International’s 401(k) offerings who claimed the Rosemead, Calif., energy holding company violated its fiduciary duties by buying retail mutual funds when nearly identical products were available through less-expensive institutional-class funds. It came to the court on the issue of calculating how long investors had to bring their lawsuit.

John Donovan, a partner in Boston for Ropes & Gray LLP, who was not involved in the case, told the Journal the opinion is a clear signal that company plans “can’t go on autopilot.”

While the ruling established principles that plan administrators must follow as fiduciaries—to act with “care, skill, prudence and diligence”—the eight-page opinion left lower courts to sort out what the principles might mean in application. S